Sunday, October 10, 2010

SUMMARY:- Stocks respond surprisingly well to another pathetic jobs report.- 95K jobs lost. Private sector creates jobs but at 64K, even less than expected.- Stock market adds to its breakout to close the week, and volume rises as a nice bonus.- Some new areas are starting to step up. Can they keep it up?

A good day of gains to close the week despite the lack of jobs report.

Friday was supposed to be all about jobs. The jobs number on the headline was not that positive with -95K versus expectations that it would be 0 to -10K jobs. Even with that bad number the market, though choppy at first, did rally with SP500 posting a 7 point gain. Futures actually moved up after the number though it was a volatile premarket session after the jobs report, no doubt, but there was a theme of the futures moving higher toward the open. Stocks sold off after the initial rise, but then slow, steady gains all the way to the close. A dip at the bell, but that had more to do with it being a Friday and investors thought they better take profits given the rally, just to make things balance out.

It was a decent upside day. NASDAQ +0.77%, SP500 +0.6%, Dow +0.5%, SP600 +1.3%, SOX +1%, NASDAQ 100 +0.77%. Gains across the board on a terrible jobs number. But, maybe it was not as terrible as the headline indicated. After all, government jobs were down -159K, and that has to make any free enterprise, capitalist, republic-loving investor happier. The government finally shrinks after exploding in growth over the past two years; a positive, but in the bigger picture, hardly a dent. The private sector jobs did rise 64K, but that was less than the 75K expected. 65K jobs is nothing; it takes 150-200K just to keep up with population growth. Despite the recession, people are still trying to come to the US to get jobs, although the word needs to go out that there are not many out there. Indeed, that is why illegal immigration is somewhat down across our southern borders.

Friday I heard financial station guests talking about how great it is that 850K jobs have been created over the last year and a half to two years. While it is nice to see people actually getting some jobs, jobs are not moving higher and sustaining a drop in the unemployment rate. Or maybe it did. After all, the unemployment rate held at 9.6% when it was expected to rise to 9.7%. Maybe happy times are here! Not. We all know there are fewer and fewer people in the jobs pool looking for work. Crowing about 65K private sector jobs is not enough to get the unemployed excited and coming back into the market and looking for jobs. Once they do feel things are better, they will come back in and then we will see that unemployment rate likely hop over 10%. You can spin this any way you want to, and you can get a little traction out of it. You can talk about the decrease in government jobs and the increase in private sector jobs, but that is about all you can get out of it. It is not any kind of great increase at all. Manufacturing lost 6K jobs and construction lost 21K. Retail managed to add 6K, and services were the bright spot with an 86K gain. There were solid indications in some sectors, but it was hit or miss. Very spotty but mostly negative or flat growth, just like the overall number.

Telling once more was the chronically unemployed -- those looking for work and not finding it for more than 6 months. Those are at 6.1M people, and that is way too many in a country such as ours. Despite that rather gloomy look, the market managed to rally. It put on a good show of it at that. It did not matter that MU missed its earnings or that Deutsche Bank downgraded the entire semiconductors equipment manufacturing sector. It did not seem to hurt stocks that had a mind to move higher. After breaking out earlier, we can see why. There was a solid move on Tuesday that cleared the resistance on SP500. Now it is free to try to run up toward the 78% Fibonacci at 1175, just another 10 points away. That is exactly what we are looking for, and the market is continuing to show an upside bias despite gloomy news in the economy.

Perhaps it is looking down the road (as it is supposed to be doing) and sees something better. Whatever the reason, it is trying to move higher right now. Could it possibly be a flood of liquidity coming from the Fed again? You never want to fight the Fed. History shows that stocks do perform better when it goes on a liquidity binge, at least while the liquidity is being added to the system. The problem comes after going on such a massive spending spree. Other markets are telling us that there is a problem out there. If we keep going on the path of devaluing our dollar and trying to jumpstart the economy by making everything worth less by devaluing our currency, eventually it leads to spiking inflation.

OTHER MARKETS

Dollar. The dollar was down. It tried to buck up and move higher on Thursday, and indeed it did, and it was trying to extend that gain on Friday. It was positive premarket as well as in the first half of the day, but as the session wore on it faded (1.3927 Euro versus 1.3918 Thursday). The dollar is getting ripped by the belief that there will be quantitative easing on the table again. When that happens, you devalue your currency. That is the way it works, pure and simple. The Fed has no problem doing it because Bernanke fears another Great Depression, and the administration likes it because it wants to inflate its way out of the massive debt it has saddled on the America public. It is not just this administration; it was the one before it as well. There is plenty of blame to spread on everyone. Some called themselves conservatives and free-market people and they were not. Others are adamantly not free-market people. The irony is that the policies in both administrations are so confused that all they have done is grow the government and grow the debt.

Bonds. Bonds overall lost a little ground in an amalgam of all the issues, but the 10 year Note held fairly steady. As a matter of fact, it was flat at 2.39%. It was stronger during the day with the yield at 2.36%, but it could not hold it into the close. Nonetheless, it remains elevated. Gold and other markets are running higher or are in anticipation of more buying of bonds and printing of money. The interesting thing is that bonds are not spiking higher. That is something I am watching and pondering. We will continue to look at them and see how they perform. Bonds should be running higher right now but they are not. Maybe they are telling us something is better down the road.

Gold. Gold has been up all week, and after a really wild reversal session on Thursday, it was right back into the game ($1,345.50, +10.50). I am looking for a pullback, and I would hate to think that is all it will give us. It has been strong, and there is reason for it to be strong. Those reasons have not changed. While it does need to have some sort of consolidation, it does not seem to want to give up any ground.

Oil. Oil had a very good week, and it ended on a good note as well ($82.63, +0.93). It rallied up to one of its resistance levels in its range, and fell back Thursday. It tested even lower on Friday but reversed off the 10 day EMA for that gain. As the dollar falls, it takes more dollars to buy a barrel of oil. That is why oil is running higher. Maybe you can make the correlation between bonds not moving higher and oil running higher. If bonds are not rallying, then perhaps the economy is going to do better instead of worse. Bonds tend to rally when the idea is that stocks are not going to do well because the economy will be poor. Maybe it is just the fact that bonds have rallied too far right now and they are running out of the ability to move higher. It could take more to get them to move than just the same old story about the Fed coming in and buying more assets.

It was clear that oil was running higher most likely because the dollar was running lower. Gold was running sharply higher because the US is bound and determined to stick with the easy money, asset-buying binge they have been on for the past three years. That holds true for all the other central banks, as we saw this week with Australia, Europe, Japan, etc.

Volume. Volume rose on the NASDAQ as well as on the NYSE. For a Friday that is a good sign, particularly when the market started soft and closed high. That is your good high-to-low price action coupled with rising volume. That is what you call good price/volume action.

Breadth. The advance/decline line was not bad at 2.5:1 on NASDAQ, and 3:1 on the NYSE. Everything was solid all week. There were not any sudden changes in price/volume volume action or in breadth that would make you think that something was lurking below the surface.

CHARTS

SP500. SP500 did post a gain. It has moved through the 1151 January peak this week. It held the move, tested it Thursday, and then it bounced. It posted a nice gain on Friday. It is coming up to the 78% Fibonacci retracement at 1175, just a mere 10 points away. It is looking solid, and it will rally likely to this level at the May peak. It may stall some and then try to make the move up to the April peak. It has been showing good momentum and getting support from other areas. It may make that move despite a lot of misgivings as to how the market could perform in the Q4.

Note that some fund managers might be trying to play catch up since they missed a lot of this run off of the August low (some even off the July low). Thus there would be more money coming in and pushing the market higher and higher. You have to juxtapose this with the earnings season coming out, so it might get up to the 78% Fibonacci retracement level and then stall out. It is never a straight shot one way or the other. There are road signs -- and sometimes car wrecks -- along the way as a stock or index moves higher.

NASDAQ. NASDAQ showed similar action, breaking higher this week again. Testing and then moving up to the new rally high on the Friday close. Volume was up, so there was good buying as it made the move. It, too, is closing in on its Fibonacci extension. Here you see the May peak. Looking at the Fibonacci chart, the 78% retracement at 2434 matches the May high. NASDAQ was just about 33 points away from that level. It is just a good day's work before it makes that resistance level. How it reacts at that point, as with the SP500, tells a little what will happen down the road. It looks like these stocks are in good shape to move higher; that is, if some of these that have pulled back can consolidate. If SP500 gets a little help from the financials, that would not hurt anything. And then it could get help from some other areas as well. We are seeing that happen with some of them.

SP600. SP600 was up 1.3% and also moved to a rally high. A straight shot moving up, testing 1-2-3, moving up, testing, and moving up. Just a nice building of these small pyramids one on top of the other, showing a healthy upside move. There will be resistance near term as well. It has this gap point from April, and it will hit that at the same time NASDAQ and SP500 hit their 78% retracement marks. Indeed, looking at the SP600 78% retracement level, it is just above that gap up point. It is going to be bumping into its resistance just about the time that the other indices do the same.

SOX. Semiconductors were up almost 1%, but they have not done anything on the week. Maybe holding steady is a win for this sector. It overcame the downgrade of the chip equipments sector as well as MU's missed earnings. All it could do was bump the 200 day EMA on the high and back off modestly to the close. It is trying to make the break through. It is not turning tail and running, but it is still following the other indices. Indeed they are probably dragging the semiconductor index higher whether it wants to or not.

LEADERSHIP

Financial. Once again, as the market moves higher, financials did not. JPM was down, but it is on the 50 day EMA. It has an interesting pattern, and maybe something comes of it. Maybe. GS bounced up to the 200 day EMA, posting a 1% gain. Interesting, but it is just at the top of its range right now. I guess you could call this a triangle. I have been watching these patterns form up in the financials, but they are not as pretty a pattern as I would want to see. There is something here, but I do not think they are quite ready. Looks like there could be more rotations here before they break higher. On a positive note, they are setting up, and we will continue to watch them. WFC looks a lot like JPM. It rallied up, it has pulled back a couple of days, and it is holding at the 50 day EMA. It is trying to set up for another bounce. That would be very helpful for the SP500 and the other indices. Note that a lot of those financials start reporting their earnings next week, and that will be important news for the market overall. Financials still make up a big percentage of the SP500 despite being gutted and trampled over the last three years.

Metals. Metals had a great week. AA beat its earnings and had a great day, bouncing over the 200 day EMA. FCX continued its unbelievable gold-like run higher. Steel is better, but STLD is still mired in a range. AKS is also mired in a range.

Technology. AAPL made a new closing high on this rally and bounced back nicely. It did not give up, and it did not have the issues a lot of other stocks have. Really nice boost for NASDAQ. GOOG had a good day as well. It is moving laterally, forming a flag on top of a flag. No complaints on how it is moving, but I would like to see more action. EMC has been an interesting stock for the market over the last several months. It is not performing as well, and that is something to keep an eye on. FFIV continued to sell, but it also rallied off of its low. Note that that was off at the last consolidation level. We will see if anything develops there. AKAM is very negative. A little head and shoulders and a break lower. It tried to hold an important level, it slumped through it on Wednesday, and it is making a low-volume recovery to that level. You call this a downside play.

Agriculture. There was data about the corn crop being pathetic, and that blasted them higher. AGU surged to the upside, and MOS gapped as well. It was a banner day for those stocks once we found out that we need more food produced and the crops will not be that great.

Retail. Retail had a good week as well. Good comeback with the same store sales. It was better than expected overall, with some saying the back-to-school season was really great. ANF gapped higher and continued to move to the upside on Friday. ZUMZ continued higher as well after it gapped up Thursday on its same store sales. There are many stocks in retail performing well and coming back to life. It is a huge sector, and not all of them move at once. You can never say all of retail is doing better. It is easy to say that, but in reality it is divided into many sectors. Overall, however, retail is performing quite nicely.

The question is how many new groups will come up and help us out. There is some movement in chemicals. There is movement in the retail stocks, although they have been volatile of late. Metals continue to move well, and some of the small industrials are starting to move. There were some coal stocks heading higher. There are stocks out there stepping up. They are coming in off very low prices, but not because they are in the trash heap. They have been working on their bases while the rest of the market rallied. Some of them have started to move up as some of the market pulls back on profit taking. That is, if it can continue and we see more of them move up, that is a sign of rotation. That the very healthy for the market. There is still not a lot surging higher to fill the shoes of those that moved ahead of it, but more and more are getting money thrown their way. Maybe we will see the tide turning before too long.

THE MARKET

MARKET SENTIMENT

VIX. Volatility has broken below its lows from late spring 2010. As the market broke higher, volatility broke lower. It did not produce a selloff as it had in July and as we thought it might have done in September. Looked like it might do it, but no. It is going to break down. This is not necessarily a bad thing. It likely just tells us that the correlation that set up during this period is now broken because the market is moving to a new range in itself. Volatility can fall to very low levels for extended periods, and it does not mean that the market is going to start selling again. You have to watch for the correlations when they set up. They did for awhile, but now it looks like that is not the case. The market the breaking higher, volatility is falling, and that is exactly what I would expect it to do.

VIX: 20.71; -0.85VXN: 21.98; -1.08VXO: 19.74; -0.86

Put/Call Ratio (CBOE): 0.85; -0.22

Bulls versus Bears:

The CROSSOVER from August is long gone but it did its job.

This is a reading of the number of bullish investment advisors versus bearish advisors. The reason you look at this is that it gives you an idea of how bullish investors are. If they are too bullish then everyone is in the market and it is heading for a top: if everyone wants to be in the market then all the money is in and there is no more new cash to drive it higher. On the other side of the spectrum if there are a lot of bears then there is a lot of cash on the sideline, and as the market rallies it drags that cash in as the bears give in. That cash provides the market the fuel to move higher. If bears are low it is the same as a lot of bulls: everyone is in and the market does not have the cash to drive it higher.

Bulls: 45.6% versus 43.3%. The crossover level at 29% bulls is long gone, but it did its job. Again, investors play catch-up with the market. The high on the last leg was 56.0% after starting at 35.6% on the low in February, the lowest it has been since July 2009 . . . until this last leg. 35% is the threshold level suggesting bullishness. After peaking at 53 on this move the bulls lost some nerve, falling to a new low post- July 2009. Once again bulls peaked out near the 50% level. Bulls have bumped at 50ish since late August 2009, falling to 45ish and then rebounding. Hit a high of 47.7% mid-June on the run from the March lows. Again, to be seriously bearish it needs to get up to the 60% to 65% level.

Bears: 28.3% versus 27.8%. The 37.7% peak at the height of the crossover is well in the rearview mirror but bears remain well below the 35% level considered bearish for the market overall. Hit 18.7% on the low in April. Hit a high of 27.8% level on the prior leg in February. For reference, cracking above the 35% threshold considered bullish. Hit a high on the prior run at 47.2%. For more reference, bearishness hit a 5 year high at 54.4% the last week of October 2008. The move over 50 took bearish sentiment to its highest level since 1995. Extreme negative sentiment. Prior levels for comparison: Bearishness peaked at 37.4% in September 2007. It topped the June 2006 peak (36%) on that run. That June peak eclipsed the March 2006 high (33%) and well above the 2005 highs that spawned new rallies (30% in May 2005, 29.2% in October 2005). That was a huge turn, unlike any seen in recent history.

NASDAQ

NASDAQ enjoyed the 'golden cross' this past week, a positive indication as it shows near term momentum swinging.

Stats: +18.24 points (+0.77%) to close at 2401.91Volume: 1.944B (+7.67%)

Up Volume: 1.285B (+117.75M) Down Volume: 646.807M (-8.287M)

A/D and Hi/Lo: Advancers led 2.54 to 1Previous Session: Decliners led 1.27 to 1

Next week there is more data, but the jobs report is out of the way. Everyone lets their breath out after that. The minutes of the Fed come out on Tuesday. Continuing claims and initial claims are on Thursday, and then there is more interesting data on Friday with retail sales for September as well as Michigan Sentiment and the New York Fed. There will also be the business inventories number. It will be interesting to see whether it is falling or rising and whether that is due to sales are falling or rising. That will give a barometer of where this recovery is.

What will be the real driver next week? There are two things occurring. Number one is the technical move that we are seeing with NASDAQ and the SP500 wanting to move up toward their 78% Fibonacci retracement. That will be a key level because it shows just how much strength the move has. If it turns tail and dives lower, that is a problem. Often they come back and test again, however. If that fails, it typically means a rollover. That is a long way off before seeing what is going to happen along those lines. I am anticipating a move up to that 78% level. Then this run we are currently on will need to take a breather, and it will then come back and test. It will either sell off or continue on, making the break and heading toward a full retracement of the April to July selloff. Things right now are looking solid. More leadership will have to show up and start pulling its own weight.

The other aspect, of course, will be earnings. They really take off next week, and they could help give us a bump and run up to that 78% Fibonacci retracement level. The market is moving as if it wants to go there, and some decent early earnings, such as AA, could give the market the impetus to run up to that level sooner than later. As we have seen in many earnings cycles, there is an initial reaction that is either positive or negative, and then the back half of the season trades in the opposite direction. That is often the case when you have stocks rallying into earnings, getting a good boost initially. We rallied into them because we thought they would be better, and they are better. So they rally some more, but then they run out of juice and sell back on the back half of the season.

The only thing that means to us is that we have to be more cautious around the 78% retracement level. Indeed, we will look to take some gain off of the table when the indices get there. Of course, that is always our game plan. We have good runs to the upside; we take gain of we have a good, sustained move; and then we let it make its test and set up all over again. The 78% is a little more important simply because it is the 78% level. It is a long retracement, and it is hard to keep the momentum up much longer past that unless it is very, very solid. The 78% Fibonacci level will tell us a whole lot about this market. It could make it all the way up there, it could make it there and stall. It could blow past it and come back and test, or it could test and then break down.

There are always many options that can happen as the market moves, but right now there is good volume to the upside, breaking through resistance. There is enough leadership to get the job done. I would like to see more coming in from new areas, and maybe that was starting last week. Financials look like they are in position to move. They have pulled back ahead of their earnings, albeit modestly, and some of their patterns are building. They are not what you would tell your mother to invest in, but they are getting to that point. If we got good earnings, they may try to make a move. That would really help SP500. The question is how much we want to buy moving towards the 78% retracement given that it is very close on NASDAQ and SP500. We will never turn down a good set up. A lot of these stocks have not become extended because they did not participate in much of that rally that started off the July and August lows. They are not that extended, and they could have room to run even if the overall market bumps into those levels and stalls out. If we get that run up to the 78% range, we will be taking some gain off the table.

I will still be looking for the plays that are obvious -- the stuff that looks good and still has plenty of room to run. They may run even further beyond the indices even if the indices stall at the 78% level. I do not know if the indices will do that. I could try to start guessing where the tops and bottoms are, and I do always make educated guesses as to where they might peak or might bottom, but no one knows for sure. Many a good trader has not scored the profits he should have scored on trades by cutting it off too early because he figured this is the top or the bottom. I stand here guilty as charged; I have done it before and I still do it on trades instead of letting them all run. That is why I often take partial profits and let the trades continue to run. We all do it here in the office because we are not smarter than the market. We play the probabilities as best we can, and then you have to let the probabilities work for you. When they do, you just let them run and let them make you money.

I have seen that over and over again in the last several months with these plays that continue to run higher. Eventually they run out of juice, such as FFIV, but it sure does make you a lot of must be in the interim. You just continue to let those positions run for as long as they will, and that is how you make your money. Pick high-probability plays, and then you let the probabilities work for you. It is like playing blackjack -- not that I want to compare this to gambling. The only one who can get away with it is James Bond. If you play the probabilities, however, you increase your chances of winning. If you play and let your stocks run for you, you increase your chances of winning and winning big.

Enough of my lesson on probabilities, although it is one of the hardest to learn. Out of 10 trades, you may only have four that work, but you will still make good money in the stock market if you manage your trades and the probabilities. With that, I will see you on Monday with some more plays in our pockets and ways to make money as the market continues on toward the 78% Fibonacci retracement.

Support and Resistance

NASDAQ: Closed at 2401.91

Resistance:2425 is an interim peak from May 20102434 is the May interim peak and the 78% Fibonacci retracement of the April selloff.2530 is the April 2010 peak (2535.28 intraday)

Support:2382-2395 from 20082324-2370 is a range of resistance from early 20082341 is the June 2010 peak2320 to 2326.28 is the January 2010 high2319 from the September 2008 peak2310 is the August 2010 peakThe 50 day EMA at 22942292 is a low from January 2008The 200 day SMA at 22892273 to 2282 marks bottom of January 2010 lateral peak2275 - 2278 from the February 2008 and April 2008 lows. Key lows.2245 from July 2008 through 2260 from late 2005. 2236 is the first August gap point.A series of interim peaks at 2230ish from the May to August trading range2221 is the gap down upside point from June.2205 is the November 2009 peak 2210 (from September 2008) to 2212 (the July 2009 closing low)2185 to 2195 represent support points for years: December 2004 peak, July to October 2005 consolidation, January, March and July 2008 lows, and October 2009 peak.2184 is the June gap bottom side.2177 is a low from March 20082169 is the March 2008 closing low (double bottom)2168 is the September 2009, intraday peak 2155 is the August 2010 low and the March 2008 intraday low2151 is the Tuesday gap down point2140 from the May and June 2010 lows2100 is the February 2010 low2099 is the recent August intraday low

S&P 500: Closed at 1165.15Resistance:

1170 is the prior March 2010 high1174 is the May 2010 high, 78% Fibonacci retracement of April peak1181 is the April selloff low1185 from late September 2008

Support:

1156 is the Sept 2008 low1151 is the January 2010 peak1133 from a September 2008 intraday lowBottom of the January 2010 consolidation 1131 to 11361129 to 1131 is the June and August 2010 peaks1119 is the early December intraday highThe 200 day SMA at 1119The 50 day EMA at 11181114 is the November 2009 peak1106 is the September 2008 low1101 is the October 2009 high and the recent May and June 2010 interim peaks1084 to 1080 (September 2009 peak)1078 is the October range low1070 is the late September 2009 peak as well as several other peaks and valleys even in 2010. Important level.1065 is the May flash crash intraday low.1044 is the October 2008 intraday high AND the February 2010 low1039 to 1040 are the May, June, and August 2010 lows

Dow: Closed at 11,006.48Resistance:11,100 from the 7-08 low11,205 is the April closing high11258 is the April 2010 peak11,734 from 11-98 peak

Support:10,963 is the July 2008 low10,920 is the recent May high10,730 is the January 2010 peak10,609 from the Mid-September 2008 interim low10,594 is the June 2010 peakThe 50 day EMA at 10,58210,496 is the November 2009 highThe 200 day SMA at 10,48810,365 is the late September 2008 low10,285 is the late December consolidation peak10,260 from the May and June 2010 interim peaks are breaking10,209 is recent August 2010 low10,120 is the October 2009 peak9938 is the August 2010 low9918 is the September 2008 peak9855 is the early September peak in its lateral range9835 is the late September 2009 peak AND the February 2010 low9829 is the September 2008 closing high9774 is the May 2010 intraday low

Economic Calendar

These are consensus expectations. Our expectations will vary and are discussed in the 'Economy' section.